Income and investment properties are measured accurately against the market by using the concepts of gross rent multiplier and capitalization rate.
GRM: Total gross annual rents/purchase price = GRM
Cap Rate: Net operating income/purchase price = Cap Rate
The most common investment pitfall in this category are when owners use single family homes, townhomes, or condos as income properties. Even when cash flow is positive, single family residential properties inevitably carry a lower cap rate and therefore offer lower income returns. In these situations, the guarantee of realized returns should be analyzed against future price growth potential, then balanced with the goals of each property owner.